Pico boo in Turnbull’s broadband

Opposition communications spokesman
Malcolm Turnbull
has investigated using a wireless technology that could slash the cost of the Coalition’s broadband plan by billions of dollars while still running fibre past most premises.

At $20 billion, the Coalition’s fibre-to-the-node (FTTN) broadband plan is almost half the cost of the federal government’s $37.4 billion fibre-to-the-premises (FTTP) being built by NBN Co.

FTTN involves running fibre to nodes that are the size of small fridges on street corners and then connecting premises to the node using existing copper phone wires.

But Turnbull’s office has confirmed to Chanticleer that the Coalition has investigated using a combination of fibre to the kerb and wireless Pico cells to deliver high-speed broadband quicker and cheaper.

This technology option is not mentioned anywhere in the documents published by Turnbull on April 9, but his office says it has looked closely at this option. It is covered off more generally in a section of the broadband background papers called “The Value of Options".

“Not only does a large and irreversible investment today in a specific variant of a single technology (FTTP) involve higher financial costs than a similar investment in the future, due to the time value of money, it also has additional downside linked to its large scale and irreversible nature.

“The loss of flexibility that results from such a commitment reduces or even extinguishes the benefit of ‘optionality’, the value of keeping options open for as long as possible, and being free to change course if that proves to be necessary (or advantageous).

It is clear that pragmatism and technology agnosticism are important components of the Turnbull plan, a fact that could see its costs fall significantly.

A report to Parliament by NBN Co last week said the cost of building the consumer access segment of the NBN’s FTTP remains at $11 billion. It said the access cost had fallen from $5000 per premises in Tasmania to $1200. The customer connect cost, which involves digging up the front garden of each premises, had fallen from $2400 to $1100.

NBN Co told Parliament that it was confident the costs in its corporate plan of $1200 for access and $1100 for connection would be maintained in its corporate plan 2012-2015.

But there are good reasons to be sceptical about that given NBN Co said it would fail to meet its June 2013 targets for premises connected and premises passed.

Also, it is notable that a FTTP project in South Brisbane rolled out by
Telstra
several years ago had customer connection costs of up to $4000 per premises.

The combination of fibre to the kerb and Pico cells could avoid the $1100 cost of digging up front gardens. Pico cells are wireless nodes that work over a distance of about 100 metres. They can utilise various mobile technologies, including HSDPA, HSPA and LTE.

The idea of using a combination of fibre and Pico cells was put to Turnbull by a communications industry expert, who also spoke to Chanticleer.

The expert, who does not wish to be named, can see obvious long-term advantages of having fibre running past each premises while using Pico cells. He says if you are running fibre to nodes on street corners, there will be a very little additional cost from running fibre down the entire street.

This form of network architecture avoids the FTTN’s reliance on the degraded copper wires that connect the majority of Australian houses to Telstra exchanges. It also opens up the possibility for those who want FTTP to pay to have fibre connected from the kerb to their home.

Pico cells need a power source, but that is not an insurmountable problem as they could be connected to power when installed on power poles along with the fibre.

The costs of installing the Pico cells could be kept to a minimum if the fibre was installed with the assistance of the local electricity utility.

Supporters of the existing NBN Co strategy were highly critical of the fibre-to-the-kerb/Pico cells approach. They claimed it would be expensive and less efficient than FTTP.

One critic of Turnbull’s policy,
Rod Tucker
, who is a director of the Institute for a Broadband Enabled Society, said one of the problems with Pico cells was the need to use spectrum to connect the cell and each premises.

However, the communications expert says it would be possible to obtain the spectrum quite easily.

Pico cells have not been used extensively on fibre networks so it could be several years before Turnbull can implement this network architecture.

Australia’s poor performance in the latest state of the internet report published by United States technology company Akamai is actually worse than it first looks. The report shows that Australia’s average internet speeds fell 23 per cent during 2012.

Australia is now ranked 41 out of 98 nations for the pace of online connections.

The same report shows that Australia’s average mobile connection speeds are slower than those available in most other developed countries.

The average Australian mobile connection speed was 2324 kbps. Average speeds were faster in the UK, Spain, Austria, Italy, Ireland, Germany, Norway and the US.

There is significant capital investment in Australia’s mobile networks being led by Telstra.

Optus and Vodafone are also investing in lifting the quality of the country’s mobile networks.

But to a regular user of Telstra’s mobile broadband using a Sim card, it is clear that its networks are heavily congested and not performing well in built-up areas.

For example, most mornings during peak hour, the internet connection using Telstra mobile is lost when travelling into the Sydney CBD.

It is interesting to see the world’s biggest passive investor, Blackrock, taking on all the outward traits of a shareholder activist.

Passive investment, which is taking over the world, judging from the growth in exchange traded funds, used not to be the source of critical comments about companies.

Attacks on boards and their corporate strategies were usually left to maverick fund managers or full time activists such as
Carl Icahn
,
Daniel Loeb
and
Chris Hohn
.

Blackrock has a history of lobbying hard in relation to corporate governance, but the latest comments by its natural resources chief investment officer,
Evy Hambro
, take it a step further.

In his interview with The Australian Financial Review, Hambro has basically told the boards of
Rio Tinto
and
BHP Billiton
to start selling assets and returning the capital to shareholders.

“You have to look at things on a relative basis, that’s the key message," Hambro says.

“You might end up selling something that is worth $1 for 90¢ but if your shares are trading at only 70¢ in the dollar, then you can use proceeds you are getting at 90¢ in the dollar to buy back your own shares.

“That’s much more value creative.

“If you really are serious about divesting assets and you’ve got other opportunities to deploy capital in, say, a share buyback to take advantage of low valuations, if you don’t get the last cent don’t worry about it because the whole strategy of simplifying the business and taking working capital out plus being able to use that money to buy your own shares at a bigger discount is exactly the right thing to do."

It would be safe to say they have already got that message.

They are selling assets, shutting down uneconomic projects and cutting costs.

Analysts say BHP could sell up to $US25 billion in assets, while Rio could sell about $US10 billion.

But Hambro seems to be saying that both companies should not be hanging around waiting to get the absolute best price for whatever assets they are selling.

He would rather see assets sold for less than book value and returned to shareholders by way of a buyback.

The sale of assets looks to be the only realistic way that capital can be returned to shareholders of BHP and Rio given their weak cash-flow positions.

Analysis by
Peter O’Connor
at Merrill Lynch shows that cash flow at both companies does not kick up significantly until 2015.